We reiterate our ‘reduce’ rating on Colgate Palmolive as we believe valuations at 26.2x FY15f do not capture the risks to earnings in FY14. We value Colgate-Palmolive at 22x one-year forward EPS of R51 to arrive at our target price of R1,120. We expect the stock to underperform the MSCI India index over the next one year.

Colgate’s results were largely in line with expectations at the top line with the company delivering 10% volume growth, but significant increase in advertising spend led to Ebitda and net income coming in 29/30% below our estimates for the quarter.

Given the heightened level of competitive intensity in the oral care segment, we believe A&P (advertising & promotion) spend is likely to remain at elevated levels.

Ebitda came in at R150 crore versus our estimate of R210 crore and consensus at R180 crore. The Ebitda margin came in at 16.2%, down 600 bps y-o-y. We were expecting an Ebitda margin at 22.5% (up 30 bps y-o-y) and consensus was at 20.4%. The key negative surprise was other expenses, which rose 47% y-o-y to 24.4% of sales (up 550 bps y-o-y). We were expecting 19.5%.